It is an open secret that the math on the proposed extension of the joint OPEC/non-OPEC production cuts isn’t quite enough to eat away the supply glut currently on the market. Russia and Saudi Arabia have agreed to a combined cut of 1.8 million bpd but the glut is huge. A strong overhang in production combined with weak seasonal consumption and the ramp up in production of other oil producing nations has limited the effect of the cuts thus far.

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A casual observer of the OPEC production cuts who has even basic knowledge of the current Geo-political situation might have cause for confusion. Why is Venezuela, a country rocked by some of the worst economic turmoil in the world not exempted from the OPEC production cuts? After all, while Libya, Nigeria and Iran are all experiencing some degree of economic turmoil, the situation is not as bad as in Venezuela which has chronic food shortages.

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All seemed quiet in the markets Monday with Asian equities rising, European shares dropping, and the S&P500 futures showing little change. But beneath this calm exterior a long awaited bounce was brewing. Brought on by months of planning and machinations involving more than a dozen governments with two leading the charge. The long anticipated agreement between the Saudi led OPEC cartel and the behemoth that is the Russian Federation had at last borne fruit. With the next planned OPEC conference less than two weeks away the announcement came not a moment to soon.

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Beyond the difficulties of global suppliers working against OPEC and happily making up for the product shortfall which the cartel is attempting there remains the problem of falling demand. Across the world the slowing economies of nations are using less oil products adding to the persistent supply glut which currently plagues the market.

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The projected continuing surge in oil production from producers unencumbered by the OPEC led production cuts is not the extent of the challenges facing the efforts to bring about a consistent rise in oil prices. Their own report forecasts a drop in the need for OPECs crude this year by 300,000 bpd. Assuming that forecast, which may be overly optimistic, proves accurate the demand for the cartels oil will be 31.92 million bpd, at that level inventories will remain largely unchanged.

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The problems with OPEC and Russia’s plan to bring the oil markets back into equilibrium don’t end with Libya. Another OPEC member exempted from production cuts is Nigeria which has been taking steps all year to ramp up oil production. Aside from the efforts being made to curb the impact of illegal refineries by stopping the so-called “sea pirates” from siphoning off oil pipelines, Nigeria is taking major steps to ramp up its own production.

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Strong words need to be followed by strong actions otherwise they simply discredit the speaker in the future. Khalid al-Falih the Saudi Energy minster, and Alexander Novak his Russian counterpart, pledged in Beijing to do “Whatever it takes” to reduce the global glut in oil products inventory. However, unfortunately for Russia and OPEC, at this point changing the direction of the oil markets will require more than just a catchy headline.

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Last Saturday the central Asian nation of Turkmenistan disclosed it’s discovery of what experts within the country believe to be a very sizable natural gas field almost adjacent to its coast with the Caspian Sea. This discovery is very well timed for the former Soviet republic which is currently discussing the possibility, with the European Union, of building a pipeline under the Caspian Sea. This pipeline could potentially link Turkmenistan’s gas fields with lucrative European markets.

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The OPEC oil market report for the month of May acknowledged a fact which astute investors in the oil sector have long known to be true, namely the cartel is losing power. A surge in U.S. output which is dominated by oil shale led to OPEC raising estimates for non-OPEC growth by 370,000 barrels per day (bpd) from April’s estimates. This represented a 64% rise from April’s projections and growth of 950,000 bpd from the previous year. This outlook marks a dramatic departure from the cartel’s estimates for growth in the U.S. just 6 months ago when production cuts were first announced last November.

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